Uncertainty is one of the central themes of investing in 2020, but investors can be certain of one thing: Valuing shares of Twist Bioscience (TWST -0.35%) at more than 30 times sales is a little bit ridiculous.
The company's technology platform is intriguing, but it hasn't shown signs of becoming a commercial success from a business standpoint. In fact, Twist Bioscience has reported growing losses as it has scaled its business and relied on equity financing to fund operations. That hasn't stopped the small-cap stock from soaring by more than 200% since the beginning of 2020.
On the one hand, Twist Bioscience is uniquely positioned to help customers respond to the coronavirus pandemic. It has also signed a flurry of drug discovery deals this year. On the other hand, the financial impacts of those catalysts are a bit fuzzy. Here's what metrics investors will be watching when the company reports fiscal third-quarter 2020 operating results.
Will announcements translate into tangible progress?
Twist Bioscience is developing a DNA synthesis technology platform that can be used in drug discovery, genetic engineering experiments, and diagnostic panels. It's not necessarily the technological endgame, but it's the best we have right now. Heck, the company supplies many of its competitors with synthetic DNA.
And its technology platform looks to be playing an important role in the global response to the coronavirus pandemic. Twist Bioscience has created synthetic controls of the SARS-CoV-2 virus that can be used in diagnostic tests to detect whether a person is currently infected, launched SARS-CoV-2 antibody panels for research activities, and inked drug discovery deals with biopharmaceutical companies developing therapeutic antibodies to treat COVID-19.
Additionally, the company doesn't appear to have slowed future-oriented investments in its technology platform and businesses. Twist Bioscience has signed non-COVID-19 drug discovery deals with Takeda Pharmaceuticals, Seismic Bio, and Invetx (an animal health start-up) since the end of the fiscal second quarter of 2020.
The biggest question facing investors is pretty simple: Will announcements translate into tangible progress?
Investors are assuming Twist Bioscience will report a noticeable bump in quarterly revenue from coronavirus-oriented research tools, although financial details weren't disclosed for any of the drug discovery deals. The latter appear to be dependent on technology access fees and milestone or royalty payments, which wouldn't necessarily have a significant near-term impact.
Here's the problem: Even an incredible quarter probably isn't enough to make sense of the stock's current valuation. Investors shouldn't be paying 30 times sales for a money-losing business that has grown operating losses faster than gross profit and is entirely reliant on stock offerings to keep the lights on.
In other words, even a relatively strong quarter could cause the stock to drop. There's simply too much success baked into the company's market valuation right now. It's difficult to see how Twist Bioscience's $3 billion valuation is sustainable with publicly available information. Then again, it's 2020. Many stock valuations don't make much sense right now.
Investors should remain grounded
A great business is always a great investment in the long run, but a great investment is not always a great business. Thus far in 2020, Twist Bioscience has been a great investment, but the stock's ascension is detached from business fundamentals. That's likely to be true even with an amazing increase in revenue from the coronavirus pandemic, assuming that's what the results show. Investors might want to take that into account, as starting or adding to a position at current prices might sap long-term returns. Unless the company announces a major event that's not currently on investors' radar, it's simply difficult to see shares holding onto recent gains.